Infant Capitalists, Infant Industries and

Infant EconomiesTrade and Industrial

Policies for Early Stages of Development in

Africa and Elsewhere

DRAFT

Akbar Noman

I. IntroductionThe resumption of growth in Africa

after the “lost quarter century”, has seen limited progress in bringing about economic transformation of the sort that lays the foundations for sustained growth

Share of manufacturing and formal sector employment has been generally declining since 1980. Ave.Manuf/GDP share fell from 17.5 percent in 1965 to 12.9 percent in 2009.

Relatedly, little success in exporting manufactures and in attracting foreign direct investment in non-extractive activities. Much of the growth of the past decade or so is accounted for by extractive activities in non-renewable resources – minerals, metals and above all, oil

Africa Task Force concerned with these issues: subject of the volume “Good Growth and Governance in Africa: ………

Focus here on a related but rather different aspect of learning, industrial and technology policies

Begin with the beginning: Adam Smith explicitly assumed the institution of a class of capitalists -- “previous accumulation” of capital

Marx followed Smith, translating “previous” as "ursprunglich” in German which his translator rendered back into English as the famous “Primitive” accumulation

What about economies at an early stage of development without “previous” or ”primitive” accumulation?

The recent large literature on institutions, including those required for the existence and functioning of markets largely neglects this question– implicitly assumes existence of capitalists/entrepreneurs in adequate measure

II. Infant Capitalist Argument

The explicit assumptions of Smith and Marx and the implicit one of much recent institutional literature (and some reform programs) acquire particular salience at stage where embarking on development aimed at moving beyond simple agriculture and crafts to producing output for which capital and learning are important

By definition “modern” private sector and capitalists absent at this stage

Inevitable, the early stages characterized by a form of industrial organization where there is no divorce between ownership and management. The capitalist and the entrepreneur are one and the same

Industrial entrepreneurship requires capital, albeit much of it typically borrowed

Alexander Hamilton’s venerable 200+ years old infant industry argument matured 6 years ago with the infant economy argument of Greenwald & Stiglitz

The essence of these is well-known and revolves around learning and spillovers

As does the infant capitalist argument: protection by reducing risks and boosting profits can help create and nurture a class of capitalists and enable learning. Can also help to direct rents into industry and entrepreneurship.

Given that capital accumulation and entrepreneurship are intertwined at “infancy”, both physical and human capital are accumulated jointly

Accumulating physical capital is necessary for learning which in turns facilitates further accumulation

This is of special relevance to much of Africa

III. Infant Capitalists in Africa

At independence, Africa lacked a class with the wherewithal to become entrepreneurs in “modern” activities. More precisely, to the extent such a group existed, it was dominated by foreigners or ethnic minorities of relatively recent origin

Certainly more recent that say Malaysia with its “bumiputra” promotion program

At independence probably greater divorce than anywhere else between economic and political elites

Not surprising then the ambivalence, at best, in the 60s and 70s, towards the private sector and resort to public ownership and management

Many countries still characterized by infant or at best toddler capitalists, especially indigenous ones

Political economy imperative to protect/create/nurture them

Whilst individuals/groups have acquired significant wealth in some countries from rent-seeking; they are discouraged from investing in modern transformational sectors

Unproductive rents not associated with investment in industry and learning

Investment climate and related “governance” reforms have been very imperfect substitutes for infant capitalist protection and associated industrial policies

These reforms have not so much reduced rents as diverted them into unproductive activities

Rents acquired via incentives to invest by an infant class of industrial entrepreneurs can be vital and facilitate learning

Of the type that succeeded so spectacularly in East Asia and to varying degrees elsewhere in parts of Asia and Latin America

IV. Lessons of SuccessEast Asia is well-known, oft cited case.

Often said to be “unique” developmental state not easy replicated

The non-replicability in Africa much exaggerated.

Also example of Pakistan as successful case of what was in effect infant capitalist protection (and surely its governance is not an impossibly high bar)

Excellent detailed study by Papanek of how Pakistan created a class of “industrialist-capitalist-entrepreneurs” from scratch almost overnight (5 years)

Papanek; Lewis: how the high and assured profits contributed to the accumulation of capital and learning . Rents acquired by investing in industry

Package of protection and low-interest long-term credit

Even the seminal work of Little, Scitovsky and Scott (LSS), otherwise highly critical of “import substitution” acknowledges this achievement

No doubt static efficiency losses but much exaggerated by LSS and others (Noman, 1991) and not so high as to clearly drown out dynamic gains

GDP and industrial growth accelerated to Korean levels before Korea. As did the emergence and growth of manufactured exports.

Korea explicitly set out to learn from Pakistan, especially how to combine protection with export promotion

As in E. Asia, availability of long-term credit on reasonable interest rates was also crucial

If Pakistan could do it, surely several countries in Africa can

V. Concluding Remarks Danger of excessively high and

irrational protection should and can be avoided. The worst sins now much better understood. We have lessons of failure that were not available in the 60s and early 70s

Also now lesson of importance of an experimental approach, of abandoning failures

Still not all governments can do it

Avoid extremes of level and variability of protection but some variability needed: moderately high for simple consumer goods in which comparative advantage, lower on intermediates (none for exports); and very low or none on capital goods

There will be rents and corruption everywhere. The question is how to minimize their negative effects and channel them into productive activities and learning

Embed protection in a strategy, a vision, in industrialization policy

Ensuring infants grow and learn: exports and competition

Another challenge: avoiding exchange rate overvaluation in resource-rich and aid-dependent economies